July 20, 2009
My concern with this rule is not the issue of protecting the investor which everyone is in favor of. My concern is the approach of believing an audit will stop all fraudulent activity from a few bad RIAs. Audits are not designed to discover fraud.
As a registered investment advisor I am not able to take any posession of client funds. If the billing is the problem the SEC is worried about then I suggest an agreed upon set of procedures where a CPA or independent party comes in and tests the billing procedures for accuracy and correctness. This would be much less cumbersome and costly than a complete financial audit. The problem with a complete financial audit is it would cover areas that are not related to any risk of client loss of funds because as an RIA I can take no control over client funds.
In summary, rather than an audit I suggest a simple agreed upon set of procedures for those who draft fees from client accounts where the accuracy of those procedures are tested and certified. If a third party is responsible for handling those billing transactions then the third party would be the ones who would need to have the testing done on their procedures.
My goal here is to ensure the investor is protected and at the same time keep the cost of operations at a reasonable level so fees to investors do not have to increase and thereby decrease their long term return. The argument is very similar to that of taxation. Anytime a tax is increased that cost is eventually passed on to the consumer so please try and keep the cost of operations down in order to allow the consumer to receive the returns the markets have to offer without incurring higher fees.